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The Malaysia – IndonesiaRemittance Corridor

Making Formal Transfersthe Best Option for Women

and Undocumented Migrants

EXPANDED SUMMARY

May 2008

Financial Market Integrity Unit

East Asia Social Development Unit

The Malaysia – Indonesia Remittance Corridor

Making Formal Transfers the Best Option

for Women and Undocumented Migrants

Expanded Summary

The World Bank Office Jakarta

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Website: www.worldbank.org/id

www.worldbank.org/indonesia

The World Bank

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Printed in May 2008

The report is a product of the staff of the World Bank. The findings, interpretations and conclusions

expressed herein do not necessarily reflect the views of the Board of Executive Directors of the

World Bank or the government they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries,

colors, denominations, and other information shown on any map in this work do not imply any

judgment on the part of the World Bank of the legal status of any territory or the endorsement

or acceptance of such boundaries.

2


Contents

Foreword ............................................................................................................................................................................ 5

Abbreviations and Acronyms ................................................................................................................................... 7

Key Statistics of the Malaysia-Indonesia Remittance Corridor .................................................................... 9

Table ES1: Economic Indicators for Malaysia - Indonesia ......................................................................... 9

Table ES2: Remittance Data ................................................................................................................................ 10

Table ES3: Migration Data ................................................................................................................................... 11

Expanded Summary .................................................................................................................................................... 13

Global Migration and Remittance Patterns ................................................................................................. 13

East and South Asian Migration and Remittance Trends ...................................................................... 14

Indonesian Migration and Remittance Trends ........................................................................................... 14

Malaysia as A Remittance Sender Country ................................................................................................. 16

Indonesian Migrants in Malaysia ..................................................................................................................... 16

Costs of Migration, Wages, and Remittances ............................................................................................. 17

Estimates of Remittance Flows in the Malaysia-Indonesia Corridor ................................................ 18

Formal Transaction Flows ................................................................................................................................... 19

Informal Transaction Flows ................................................................................................................................ 20

Deciding Between Formal and Informal Transfer Options .................................................................... 21

Remittance Distribution in Indonesia through Formal Transfer Mechanisms ............................. 23

Remittance Distribution in Indonesia through Informal Transfer Mechanisms .......................... 24

Conclusions .............................................................................................................................................................. 25

Formal or informal: The migrants perspective .................................................................................... 25

Formal or informal: The development perspective ........................................................................... 26

Formal or informal: The financial sector perspective ....................................................................... 26

Operational Policy Recommendations ......................................................................................................... 27

1. Making the formal sector accessible and responsive to migrant workers ........................ 27

2. Facilitating migrant workers access to the formal sector ......................................................... 29

3. Formalizing and regulating the informal providers while maintaining

their accessibility for migrant workers .............................................................................................. 30

Concluding Remarks............................................................................................................................................. 31

Bibliography.................................................................................................................................................................... 33

Map of Indonesian Overseas Migrant (Outflows) and Remittances (Inflows)

Based on Migrant’s Place of Origin for the First Quarter2007 .................................................................... 36

3

List of Figures

Figure 1. Indonesian Migrants, Major Destination Countries (1997-2006) ............................................ 14

Figure 2. Total Remittances Inflows to Indonesia by Region, January – April 2007 .......................... 16

Figure 3. Foreign Workers in Malaysia by Nationality, December 2006 ................................................. 17

Figure 4. Flows of Indonesian Migrant Workers to Malaysia and Saudi Arabia (1997-2006) ......... 18

Figure 5. Remittance Outflows from Malaysia (1997-2006) ......................................................................... 19

Figure 6. Costs per $100 of Remitting Different Sums of Money, April 2007 ....................................... 20

Figure 7. The Remittance Market between the Two Countries .................................................................. 22

List of Tables

Table 1. Estimates of Remittances in the Malaysia-Indonesia Corridor in 2006 .................................. 19

Table 2. Comparing Incentives Facing Undocumented Migrant Workers ............................................. 23

List of Box

Box 1. Risks of Informal Transfers ........................................................................................................................... 21

4


Foreword

The partnership between the World Bank’s Financial Market Integrity Unit and the

East Asia Social Development Unit brings together two different perspectives on

the transfer of remittances from Malaysia to Indonesia. The Bank has been at the

forefront globally in research on remittances - and the Financial Market Integrity Unit

brings a particular focus on analysis of defined bilateral remittance corridors, with attention

to integrity issues and specific incentives influencing the choices of channels to send money

home. The regional Social Development team’s research on the vulnerability of female

migrant workers and their use of remittances brings a unique human perspective. Both

perspectives are reflected in the Malaysia–Indonesia Remittance Corridor: Making Formal

Transfers the Best Option for Women and Undocumented Migrants.

The number of Indonesian migrants in Malaysia has increased rapidly in recent years, and

female migrants outnumber men. The corridor is also marked by a substantial flow of

undocumented migrants. Despite this, remittance flows from Malaysia to Indonesia through

formal channels have declined since 2002. Migrant workers make the choice of how to

transfer and use the remittances they send home, and their choice at the moment is with the

informal sector. Research shows that more formalized systems could improve financial sector

development and enhance poverty reduction by providing greater security and reliability,

reducing costs, and improving migrants’ options for investing in better outcomes. However,

major changes in approach will be needed to attract migrant workers back to the formal

sector.

Meanwhile, the important role of the informal sector in providing easily accessible solutions

is recognized. Greater regulatory oversight of this sector, while an important element, must

be proportionate to the risks involved in order that migrants are not driven towards greater

informality of transfers. Regulations should focus on enabling markets to function and

encouraging solutions, and migrant workers need to be recognized for their important

contribution to the economy and empowered to engage with these markets. The remittance

market can also benefit from greater incentives to the private sector which can generate

customized services for migrants given new data on the potentially large and lucrative market

for financial products and services.

An encouraging development has been that new analysis from this report has already

generated policy dialogues between the authorities in Indonesia and Malaysia. These efforts

5

will address the important challenges of developing the remittance markets that can

efficiently meet the varied needs of migrant workers in a safe and secure environment.

Latifah Merican Cheong Sarah Cliffe

Program Director Director

Financial Market Integrity Unit Strategy and Operations

Financial and Private Sector Development East Asia and Pacific Region

The World Bank The World Bank

6


Abbreviations and Acronyms

AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism

AMLA Anti-Money Laundering Act

ATM Automated Teller Machine

BI Bank Indonesia

BNI Bank Negara Indonesia

BNM Bank Negara Malaysia

CGAP Consultative Group to Assist the Poor

CIMB Commerce International Merchant Bankers

FDI Foreign Direct Investments

FDIC Federal Deposit Insurance Corporation

FIU Financial Intelligence Unit

GDP Gross Domestic Product

GNI Gross National Income

ID Identification

IDR Indonesian Rupiah

IMF International Monetary Fund

IOM International Organization for Migration

IT Information Technology

MEPS Malaysian Electronic Payment System

PBI Peraturan Bank Indonesia (Bank Indonesia Regulations)

PPATK Pusat Pelaporan dan Analisis Transaksi Keuangan (Indonesian FIU)

PPTKLN Directorate General of Overseas Employment Development (Indonesia)

RM Malaysian Ringgit (currency abbreviation)

Rp Indonesian Rupiah (currency abbreviation)

TKI Tenaga Kerja Indonesia (Indonesian overseas migrant worker)

UK United Kingdom

US$ United States dollar

The exchange rate conversions for all amounts used in this report are as follow, as of June 20, 2007:

US$ 1 (United States dollar) = RM 3.4320 (Malaysian Ringgit)

US$ 1 (United States dollar) = Rp 8,940 (Indonesian Rupiah)

7

THE WORLD BANK GROUP

Vice President (EAPVP) : James Adams

Vice President (FPDVP) : Michael Klein

Country Director : Joachim von Amsberg

EASSD Director : Christian Delvoie

FPDFI Program Director : Latifah Merican Cheong

EAS Sector Manager : Sonia Hammam

Country Sector Coordinator : Scott Guggenheim

Task Managers : Raul Hernandez-Coss, Gillian Brown, Chitrawati Buchori

Task Team : Isaku Endo, Emiko Todoroki, Tita Naovalitha, Wameek Noor,

Cynthia Mar

Joint Donors : UK Department for International Development

8


Key Statistics of the Malaysia-Indonesia Remittance Corridor

Table ES1: Economic Indicators for Malaysia - Indonesia

Malaysia Indonesia

General

Population (million, 2006) 25.8 223

Population Growth (annual%, 2006) 1.6 1.1

GDP Growth Rate (annual %, 2006) 5.9 5.5

GDP(US$billion, 2006) 148.9 364.5

GNI (US$billion, 2006) 141.4 315.8

GNI per capita (US$, 2006) 5,490 1,420

Foreign Direct Investment, net inflows (balance of payment, US$ billion, 2005) 3.97 5.26

Official Development Assistance and Official Aid (US$ billion, 2005) 0.03 2.52

Source: World Development Indicators database, April 2007

9

* The data for the categories in which the sources has been left blank is calculated by FPDFI and EASSO units, World Bank,for the sole purposes of this report

** Department of Statistics, Malaysia (DSM).a Formal remittance estimates by BI using BI statistics; these statistics have been derived from monthly reporting of Indonesian

banks and remittance service providers rather than BI’s estimation in balance of payment statistics; the latter procedurewould have suggested informal flows to be about 70 % (1.9/5.7 times 100).

b (.24/2.732 times 100) = approximately 90 percent of informal flows.c Annual average transfer fees are based upon the assumption that workers remit twice a year through bank channels.

Table ES2: Remittance Data*

Remittances Amount Source

Total Remittance Inflows to Indonesia from all countries (US$billion,2006) 5.6 BI

Formal Remittance Inflows to Indonesia from all countries (US$billion, 2005) 1.9 BI

Total Remittance Outflows from Malaysia to all countries (US$billion, 2005) 5.7 DSM**

Formal Remittance Outflows from Malaysia to all countries (US$billion, 2006) 2.1 BNM

Total Remittance Inflows to Indonesia from Malaysia (US$billion,2006) 2.7 BI

Formal Remittance Outflows from Malaysia to Indonesia (US$billion, 2006) 0.26 BNM

Formal Remittance Outflows from Malaysia to Indonesia (US$billion, 2006) 0.24 BI

Informal remittances as % of total remittance inflows for Indonesia 80% BIa

Informal remittances as % total remittance inflows to Indonesia from Malaysia specifically 90% BIb

Remittances Inflows to Indonesia as % of Indonesian GNI (2006) 1.8 BI

Remittance Inflows to Indonesia as % of Indonesian GDP (2006) 1.5 BI

Average remittance amount range (anecdotal surveys, US$) 115-150

The Country Providing Indonesia with the largest remittance inflow Malaysia BI

The Country Receiving Malaysia’s Largest Remittance Outflows Indonesia BNM

Remittance Operations

Main Transfer Mechanisms Cash-couriers,Electronic Transfers

Estimated annual average Transfer Fees (through bank channels),to send from Malaysia (US$) 7

Estimated annual average Transfer fees (through bank channels),to receive in Indonesia (US$) 20

Total Yearly Average Remittance Transfer Costs (US$)c 27

10


Table ES3: Migration Data*

Migrants

Estimated Number of Indonesian Migrant Workers in Malaysia (documented, 2007) 1.3 million MHAM**

Estimated Number of Indonesian Migrant Workers in Malaysia (undocumented, 2007)a 700,000 MHAM**

Average Annual Salary Range of Indonesian Migrant Workers in Malaysia (US$)b 960-2040 MHAM**

Range of Annual Cost of Migration on average (US$) 343-475

Range of Total Annual Migration and Transfer Costs (US$) 370-502

Migration and Remittance Transfer Costs as Percentage of IndonesianMigrant Workers Salary (averaging total cost range and salary range, US$) 29

Percent of Salary Sent back as Remittances (on average) 45% BI

* The data for the categories in which the sources has been left blank is calculated by FPDFI and EASSO units, World Bank,for the sole purposes of this report.

** Ministry of Home Affairs, Malaysia.a The Ministry of Home Affairs, Malaysia (MHAM) assumes that the 700,000 undocumented workers listed in table are nearly

all TKI (Tenaga Kerja Indonesia, Indonesian migrant workers).b Yearly salary calculated by taking the average monthly salary times 12; average monthly salary information provided by the

Ministry of Home Affairs, Malaysia (MHAM).

11

14


Expanded Summary

The main objective of this report Malaysia–Indonesia Remittance Corridor: Making Formal Transfers

the Best Option for Women and Undocumented Migrants is to contribute to policymakers’ efforts

to increase the impact that remittances have on economic growth and poverty reduction

in Indonesia, and investigate options for attracting more migrants to use the formal financial

sector. The report provides a descriptive overview of the Malaysia–Indonesia remittance corridor

and suggests some policy avenues for improving access to formal remittance transfer channels;

increasing the transparency of the flows and the cost structure; and facilitating the transfer of

remittances, particularly for undocumented and female migrant workers.

GLOBAL MIGRATION AND REMITTANCE PATTERNS

More than 190 million people, approximately 3 percent of the world’s population, are living in

countries in which they were not born.1 Global remittances have increased steadily over the last

decade and recorded remittance flows to developing countries in 2006 are estimated at US$204

billion. However, the true size, including unrecorded flows through formal and informal channels,

is believed to be significantly larger.2

1 World Bank, Atlas of Global Development: A Visual Guide to the World’s Greatest Challenges (Washington, D.C.: HarperCollinsand World Bank, 2007)

2 World Bank, Global Economic Prospects: Economic Implications of Remittances and Migration 2006, (Washington,D.C.:World Bank, 2005).

13

EAST AND SOUTH ASIAN MIGRATION AND REMITTANCE TRENDS

One-quarter to one-third of the total international migrant stream comes from the nine largest

Asian immigrant-exporting countries—the Philippines, India, Bangladesh, Pakistan, Indonesia,

Thailand, China, Sri Lanka and Myanmar.3 According to IMF balance of payment data from 2005, the

East Asia and Pacific Region as a whole accounted for US$45 billion, 17 percent of global recorded

remittance inflows. The 2005 International Organization for Migration (IOM) study noted three

important trends in Asian migration: (a) increasingly, more South and East Asian migrants are

finding employment closer to home; (b) these regional migrant labor flows also seem to be increasingly

undocumented workers; (c) lastly, more and more South and East Asian migrants are women. 4

INDONESIAN MIGRATION AND REMITTANCE TRENDS

In 2006, 680,000 Indonesian migrant workers traveled overseas with contracts to work in other

countries.5 The number of Indonesian migrant workers abroad is thought to be around 4.3 million.

Migration has been steadily increasing since the early 1980s, and female migrants have consistently

outnumbered men.

There has been a rapid and steady increase in migration to Malaysia from Indonesia since 2003

(Figure 1). Of the Indonesians that were approved to work overseas in 2006, 85 percent of went to

Saudi Arabia and Malaysia.6 Almost 80 percent of all the migrants leaving in 2006 were women,

and 88 percent of these women went to work in the informal sector overseas. Migrant workers

tend to come from specific regions in Indonesia such as West Java, Central Java, East Java, East

Nusa Tenggara, West Nusa Tenggara, South Sulawesi, and Lampung. Hence remittances to Indonesia

also tend to be concentrated in these provinces.

Figure 1. Indonesian Migrants, Major Destination Countries (1997-2006)

Source: Ministry of Manpower and Transmigration, Indonesia.

3 World Migration Report (IOM,. Geneva, 2005).4 World Migration Report (IOM,. Geneva, 2005).5 National Authority for the Placement and Protection of Indonesian Overseas Workers and Ministry of Manpower and

Transmigration6 Directorate General of Overseas Employment Development (Indonesia)

14


In 2006, IMF balance of payments records US$5.7 billion

in remittances to Indonesia from all over the world. This

figure is calculated from stock of migrants and survey

estimates of contract amounts and percentages of

remittances sent home. This methodology was introduced

in 2005 when it was recognized that the US$1.9 billion

reported by banks7 and non-bank financial institutions8 was

a substantial underestimate of the total amount. Using the

new methodology the 2005 figure was revised to US$5.3

billion, and has risen steadily since then. 9

Only about 10 percent of the districts in Indonesia send

significant numbers of migrants overseas. Hence, while

the level of remittances may appear small relative to total

GDP, these inflows may be highly significant in a local context.

In certain provinces of Indonesia, remittance inflows are

greater than total local income.10 For example, in the first

quarter of 2007, it is estimated that migrants from the

province of East Java remitted over Us$90 million to East

Java specifically, accounting for nearly 62 percent of total incoming remittance inflows to the

country (Figure 2).11 In fact, nearly 90 percent of all remittances to Indonesia flow into the populous

island of Java.

The majority of migrants are from the rural areas where poverty is greatest; hence an impact on

poverty reduction would be expected. However, there is no information on the macroeconomic

impact of remittances on economic growth, net effect on poverty alleviation, and the extent to

which such flows have influenced social welfare indicators in the beneficiary community. Moreover,

qualitative research indicates that there is significant room for improving both the quantity and

the quality of investment of remittances in order to achieve sustainable social welfare outcomes.

7 From a total 138 resident banks, 104 report foreign exchange transactions.8 Non-bank financial institutions are: securities, insurance, finance and trust companies.9 Bank Indonesia, Balance of Payment Statistics, 2004-2006, Balance of Payment Summary Chart (Jakarta, 2007).10 This is the case in West Nusa Tenggara, which received remittances totaling over 300 billion rupiah in 2002, well exceeding

the 61 billion rupiah local revenue in 2001. Sukamdi, Elan Striawan, and Abdul Haris, “Impact of Remittances on theIndonesian Economy,” in Aris Ananta and Evi Nurvidya Arifin (eds), International Migration in Southeast Asia (Institute ofSoutheast Asian Studies, Singapore 2004), p 155.

11 National Authority for the Placement and Protection of Indonesian Overseas Workers.

15

Figure 2. Total Remittances Inflows to Indonesia by Region, January – April 2007

Source: Institution Service for Indonesian Migrant Workers in District Area

MALAYSIA AS A REMITTANCE SENDER COUNTRY

Bank Negara Malaysia (BNM) recorded US$1.8 billion total outflows in 2005 through banks and

remittance service providers. However, alternative calculations based on sampling survey

undertaken by the Department of Statistics, Malaysia, indicate total remittance estimated outflows

US$5.7 billion in 2005.

INDONESIAN MIGRANTS IN MALAYSIA

Indonesian migrant workers constituted the largest group of migrant workers in Malaysia,

accounting for more than 60 percent of the total migrant labor force (Figure 3).12 Malaysia is an

attractive destination for Indonesian migrants because of the geographical proximity and cultural

familiarity between the two countries makes Malaysia a relatively convenient destination for

migrant workers. Figure 4 shows the male and female breakdown of the migrants to both Malaysia

and Saudi Arabia through the formal sector. Flows to both countries are now majority female

migrants with a higher percentage of migrants to Saudi Arabia being women (90 percent)

compared to Malaysia (60 percent). Organized migration between Indonesia and Malaysia has

been strengthened by Memorandums of Understanding signed in 2004 and 2006.

12 Ministry of Home Affairs. Malaysia

16


Figure 3. Foreign Workers in Malaysia by Nationality, December 2006

Source: Ministry of Home Affairs, Malaysia

Best estimates are that there are 1.2 million undocumented workers in Malaysia, of which 60

percent are Indonesian.13 Undocumented migrants tend to work on plantations, in construction,

agricultural farms, fish ponds, and service industry. Undocumented workers essentially have no

legal protection and in some cases, employers take advantage of their immigration status when

hiring them.

COSTS OF MIGRATION, WAGES, AND REMITTANCES

There are significant costs associated with migration such as administration fees, placement fees,

pre-departure accommodation and living costs, and transportation. Migrant workers have to

take out loans to cover these costs; though with limited access to the formal financial sector, they

are often forced to turn to informal loan providers, including the migration recruitment agents

themselves who will deduct the money from their salaries. The average wage of migrant workers

in Malaysia is between US$90 and US$200 per month, and there is little difference between the

salaries paid to male and female migrant workers. Estimates from surveys carried out by Bank

Indonesia (BI) indicate that about 45 percent of migrant worker salaries are remitted back to

Indonesia.

13 “Southeast Asia,” Migration News, Vol 14, No. 3, July. www.migration.ucdavis.edu.

17

Figure 4. Flows of Indonesian Migrant Workers to Malaysia and Saudi Arabia (1997-2006)

Source: Ministry of Home Affairs, Malaysia

ESTIMATES OF REMITTANCE FLOWS IN THE MALAYSIA-INDONESIA CORRIDOR

According to Bank Indonesia, total remittances coming into Indonesia from Malaysia were around

US$2.7 billion in 2006, calculated using their new methodology. Bank Indonesia also estimates

that approximately 9-10 percent of remittances to Indonesia from Malaysia flow through formal

systems. Specifically, it estimates that approximately US$0.26 billion was transferred into Indonesia

from Malaysia through formal systems in 2006 (based on reports through banks and remittance

service providers). Table 1 presents both official remittance figures of the Malaysia–Indonesia

corridor and updated BI estimates of Malaysian inflows using newer methodology. For the

purposes of this report, the study team recognizes that Bank Indonesia’s total remittance estimates

of nearly US$2.7 billion in 2006 in the Malaysia–Indonesia corridor as probably being the closest

estimate of the amount of remittances being transferred to Indonesia from Malaysia.

Remittances from Malaysia to Indonesia through formal channels decreased by over 30 percent

from a high of nearly US$387 million in 2002, to US$262 million in 2006 (Figure 5). This is

despite the significant increase in the number of migrants going to Malaysia. The implication is

that migrant workers increasingly choose alternative means of transferring remittances back.

Reasons for this are discussed in the following paragraphs.

18


Table 1. Estimates of Remittances in the Malaysia-Indonesia Corridor in 2006

Reporting from banks Estimates based on Percentage transferred

and remittance service sampling or migrant stock through formal channels

providers (formal)

Malaysia US$0.26 billiona maximum of US$3.6 billionb

Remittances sent Source: Source: World Bank roughto Indonesia Bank Negara Malaysia estimate based on migrant

stock and Department ofStatistics, Malaysia Approx 10%

sampling survey Source: Bank Indonesia

Indonesia US$ 0.24 billion US$2.66 billion

Remittances received Source: Bank Indonesia Source: Bank Indonesiafrom Malaysia bank and remittance figure, estimate based on

service provider reporting migrant stock

a The US$0.26 billion figure quoted by BNM in 2006 denotes the total financial flows from Malaysia to Indonesia including theemployee remuneration and worker remittance categories.

b Based on 2005 Malaysian Ministry of Home Affairs data which states that 63 percent of total foreign workers in Malaysia areIndonesian. It is estimated that approximately the same proportion of total balance of payment remittances paid would begoing to Indonesia or US$3.59 billion. However, given that there are significant transfers to industrialized countries (UnitedStates, United Kingdom, Singapore) likely to be of much greater amounts, this figure is likely to be an overestimate.

Figure 5. Remittance Outflows from Malaysia (1997-2006)

Source: Bank Negara Malaysia, based on bank and remittance service provider reporting.

FORMAL TRANSACTION FLOWS

Ninety percent of formal remittance transfers go through banking institutions14 while the rest

channel through non-bank institutions.15 According to some banks, the average transaction can

14 22 Commercial Banks, 11 Islamic Banks, 1 DFI (National Savings Bank), 6 Non-Bank Remittance Operators, 1 PosMalaysia.

15 Interviews with BNM officials, April 2007.

tahun

19

range from US$87 to US$146, and remittances are sent at least twice a year. Recent studies by

Bank Indonesia have found that Indonesian migrant workers generally remit 40-50 percent of

their income, implying much larger flows through informal channels.16 Fees for remitting funds

from Malaysia vary; however, most formal providers have a regressive charge structure whereby

the cost of transferring US$100 dollars decreases with the total amount spent (Figure 6).

Figure 6. Costs per US$100 of Remitting Different Sums of Money, April 2007

Source: Authors’ interviews with remittance service providers.

Requirements for identification could also be a deterrent, especially for undocumented migrant

workers. Since September 11, 2001, the regulatory environment in which the banking sector

operates has been tightened to prevent money laundering or financing of terrorisms. New

regulations have, among other things, tightened the need for credible identification. For

remittance service providers, a national passport is the main identification document for non-

nationals to process remittance transfers.17 For the opening of savings accounts, these institutions

require, in addition to national passports, the work permits; and in some cases branch managers

are required to approve the opening.

INFORMAL TRANSACTION FLOWS

The use of informal channels is predominant in the corridor. Informal channels encompass money

changers, courier services, hand delivery, and employment agencies. Use of informal channels is

inadvertently fostered by the agency system. The broker who introduces the worker to an

employment agency may also finance the initial costs of migration. The worker then must send a

16 Interviews with Bank Indonesia17 Including Pos Malaysia.

rela

tiv

e c

ost

re

du

cti

on

transfer amount in US$

20


18 Although this is a formal bank channel, it is considered informal remittance transfer because the recipient is not known orrecorded. It is unclear how remittances sent through money changers are distributed once they arrive in Indonesia.

19 Based upon interviews with middlemen and TKI by World Bank staff

portion of his/her earnings to the broker to settle the debt. For an additional fee, the broker can

also deliver money to the workers’ families. They continue to use this “system” even after the debt

is cleared. Returning migrants may also carry cash on behalf of others. These remittance couriers,

who may or may not be close friends or family members of migrant worker, bear substantial risks

of seizures at custom checkpoints and losses due to robbery (Box 1).

In the case of some informal transfers, funds channel through the hands of middlemen or

immigration promoters. Money changers give the cash to someone who will hand-carry the

money back to Indonesia or may use their own bank accounts to transfer funds.18 A middleman or

immigration promoter lends the money to the worker, who will repay the loan through his or her

earnings. The middleman will generally travel from Indonesia to Malaysia to collect the sums and

may also carry money to be delivered to the worker’s family.19

Foreign exchange bureaus appear to play a significant role in this corridor. Many money changers

are formal businesses since they are regulated in their function as foreign exchange agents.

However, when money changers serve as remittance channels, the flows are not regulated or

measured. Steps are already being taken under the revisions to the Exchange Act to establish

criteria that money changers would need to meet to be able to send back remittances.

Box 1. Risks of Informal Transfers

“Initially I saved my earnings. When I knew that a friend was going home, I gave her my money to

give to my parents. I had met her at my agent’s place. I didn’t know her that well, but I trusted her.

She was a Mutaware woman from Beber Village, not far from Barabali. My parents received the

money a month late. I rang my family in the village and told them that I had given her RM 1,450 and

they told me that she had only given them Rp 1,000,000 which she had paid in three installments.

They should have received the equivalent of RM 1,450 which is about Rp 2,250,000.”

Susi, 28 years old, Barabali Village, Central Lombok

DECIDING BETWEEN FORMAL AND INFORMAL TRANSFER OPTIONS

In theory, a migrant worker has several different kinds of remittance service providers from which

to choose. There are regulated and unregulated providers in the Malaysia–Indonesia corridor:

banks, money changers, the post office, money transfer operators, account mediators, or

middlemen. Because of the geographical proximity of the two countries, sending money home

with family members or relatives may also be a convenient option. Figure 7 below describes the

overall remittance market between Malaysia and Indonesia. It details the major formal and informal

remittance service providers in Malaysia, their lowest transfer fees, and their associated partners

on the Indonesian side.

21

Figure 7. The Remittance Market between the Two Countries

Source: World Bank interviews.

Several factors influence the choices made by the migrant workers including:

• Physical access. The ease with which the migrant worker can physically access the point

of entry in Malaysia. This could be restricted by distance and the ability of the migrant

worker to leave the workplace during opening hours.

• Institutional access. the ease with which the migrant worker can deal with the

administration required, and also the user-friendliness or the approachability of the point

of entry.

• Regulatory access. The degree to which regulations and requirements might restrict

access.

• Cost. There is a wide variance in the costs associated with transferring funds.

• Competition. The extent to which other sources provide easier and cheaper access.

• Financial literacy. Many recipients do not know whether administrative fees are deducted

from the amounts they receive through banks. Foreign exchange rates also play a key

role in optimizing the amount of money received by Tenaga Kerja Indonesia (TKI or Indonesian

migrant workers) beneficiaries. From the report team discussions with returned migrants,

it seemed that their experiences abroad had given them a general understanding of

Banks (22)

DFI (1/6)

Postal (1)

Non-bankRO (6)

Money Changers(800)

RecruitmentAgency

Other Info. Prov.

Maybank

CIMB

Public Bank

RHB

Affin Bank

BSN

Pos Malaysia

BNI

Bank Niaga

BCA

BRI

Pos Indonesia

Money Changer

RecruitmentAgency

Money Changer

WU Agent MG Agent

Type of RSPs Malaysia Lowest Transfer Fees Indonesia

RM10

RM10

RM7

RM10

RM5+RM30 cable fee

RM4 - Bank Draft

RM4

One of the largest network

Located in urban areas

One of the largest network,large ATM network

High penetration in rural areas

Higher penetration in rural areas

No one has offered services to Indonesia yet

RM4

Acts as a cash courier. A commission could be 10%of amount transferred

Cash transfer thru family and self, in-kind remittances

22


financial mechanics learned through either their own or others’ (unfortunate) experiences.

However, increasing financial literacy before migration may prevent some of these

unfortunate experiences from occurring.

The major incentives of using different formal and informal transfer mechanisms for TKI are

compared in Table 2.

Table 2. Comparing Incentives Facing Undocumented Migrant Workers

Incentives Bank Postal Money transfer Money Informal

(money order) operator changer channel

Access without ID no no no yes yes

Geographic coverage limited good limited unknown goodin Malaysia

Relative price of fees variable inexpensive expensive inexpensive unknown

Speed moderate-slow slow fast fast variable

Language barrier variable variable variable variable none

Minimal paperwork no no no yes yes

Source: World Bank based upon interviews with TKI and remittance service providers

REMITTANCE DISTRIBUTION IN INDONESIA THROUGH FORMAL TRANSFER MECHANISMS

The Indonesian financial sector is large and diverse, spanning three tiers of banking service

providers. The state-owned bank, Bank Rakyat Indonesia, is the primary provider of banking services

to lower-income households and is making profits. Operating through 4,600 village units, the

bank has 30 million account holders, making it the largest bank (by number of accounts) in

Indonesia. In addition, the Bank Perkreditan Rakyat has an estimated 6 million account holders. The

customers of Bank Rakyat Indonesia and Bank Perkreditan Rakyat are estimated to make up as much

as two-thirds of all bank customers. However, banking penetration remains low with 20-30 percent

of adults estimated to have a savings account.20

The distribution of remittances received in Indonesia through formal regulated channels is

concentrated in the banking sector. The cost of opening and maintaining an account is

comparatively high, and fees charged by banks in Indonesia are higher than those charged by

Malaysian banks. Pos Indonesia (postal service) coverage is limited with only 50 branch offices

capable of disbursing remittances quickly. Also, even in the formal system customers are not

necessarily protected from scams with fake commissions and “facilitators” adding to the costs.

20 Genesis Analytics, Implementing FATF Standards in Developing Countries and Financial inclusion: Findings and guidelines(Forthcoming).

23

REMITTANCE DISTRIBUTION IN INDONESIA THROUGH INFORMAL TRANSFER

MECHANISMS

Convenience and accessibility issues with banks nurture the role of account mediators and

facilitators, increasing the cost of collecting remittances. The mediator will retrieve the cash from

his own account into which it was deposited from Malaysia, and bring it (courier service) to the

recipient. Facilitators are trusted with different activities, some of them are only “messengers”

informing the recipients that they have received a remittance; others queue in banks’ lines on

behalf of the recipient or exchange hard currency outside bank premises at a better conversion

rate. The “account mediator” is the one that plays the most critical role in the distribution of

remittances.

In December 2006, Bank Indonesia issued a new regulation allowing remittances agents to

conduct remittance transfers.21 The new regulation opened up the market for new remittance

service providers different from banks, recognizing the role of informal operators on transferring

funds. The regulation aims to prevent remittance channels from being abused by money launderers.

It also aims to optimize the consumer protection on money remittance activity. Well-managed

operators through appropriate legislation would provide legal protection, guarantees, and security

for both remitters and beneficiaries. Other benefits of regulating remittance service providers

include enhanced recording of remittance flows for balance of payment purposes, allowing the

Government to maximize the monetary potential from remittance flows, and increasing investment

in the remittance recipient areas for small and medium enterprises.22 The information gathered

on remittance transfers can be utilized to promote payment services and to improve the economy

in general.

Bank Indonesia has adopted a gradual transition from registration to licensing for the

remittances agents.23 The transition period provides an opportunity to those entities that are

currently operating informally to register by December 31, 2008..24 During 2008, Bank Indonesia

expects to issue a circular detailing the licensing process for both newly applying agents as well as

for already registered agents, based on experience with the current registration process. After

January 1, 2009, all new agents are required to apply for a license. The shift from registration to

licensing obligation will take place after Bank Indonesia has gained a picture of the readiness of

remittances agents.

Under the new regulations, individuals as well as corporate entities will legally be able to act as

remittance agents Written agreements including rights and responsibilities of both parties will

be needed for collaborations between agents and money transfer operators. These agreements

21 Bank Indonesia Regulation No. 8/28/PBI/2006 regarding money transfer activities22 Bank Indonesia Regulation No. 8/28/PBI/2006. Elucidation.23 This regulation applies only to remittances agents, and not to money transfer operators such as Western Union and

MoneyGram.24 Bank Indonesia Regulation No. 8/28/PBI/2006. Article 30.

24


will be submitted to Bank Indonesia. Requirements for registration and licensing are quite similar.

After completing registration or obtaining a license, agents are obliged to, among others, record

money transfer transactions, submit periodical and incidental reports to Bank Indonesia, provide

information to remitters regarding money transfers, and report suspicious transactions to

Indonesia’s Financial Intelligence Unit (PPATK).

CONCLUSIONS

Indonesian migrants in Malaysia

are increasingly showing a clear

preference for informal transfer

mechanisms compared to their

counterparts in other countries.

Despite the increasing flow of

migrants, the amount of

remittances transferred through

the formal sector in the

Malaysian–Indonesian corridor is

decreasing. Only about 10

percent of the estimated flow of

remittances into Indonesia from

Malaysia is transferred through

the formal system. The extent of

the preference for informal sector

is unique, as Indonesian migrants

in other countries are using the

formal sector far more than the

migrants in Malaysia.

As the corridor is characterized by a large presence of undocumented migrants, and increasing

percentage of women, the implication is that these two groups of migrants in particular find

formal sector transfers either hard to access or inappropriate for their needs. Possible reasons

for this include lack of physical access, identification and other formal requirements that cannot

be met, high costs compared to alternatives, and the expansion of more easily accessible informal

options. An unregulated industry has arisen to facilitate remittances in this corridor. This industry

includes account mediators, migration agents or agencies, and informal channels that are part of

formal enterprises (money changers) and is a significant feature of the Malaysia–Indonesia corridor.

Formal or informal: The migrants perspective

From the migrant workers perspective, informal transfers may be more convenient, more easily

accessible, or cheaper. For some, especially women, lack of access to pre-departure credit to pay

the upfront costs of migration through the formal sector leads them into arrangements with

25

recruitment agents or others. In these situations, the workers are obligated to send money back

through the recruitment agent or others to pay off debts even if the arrangements may not be to

their best advantage. Undocumented migrants in particular have few alternatives other than the

informal sector because of their legal status. However, some of the informal options such as

sending money back with couriers may be insecure and unreliable.

Despite the disadvantages of the informal sector, the formal sector has little to offer the migrant

workers in its current state. It is less competitive in terms of accessibility and provides little added

value in terms of access to the much needed pre-departure credit or other instruments that

might appeal to the migrant workers, especially women and the undocumented. While some

migrant workers do not have access to the formal sector in the first place, the declining formal

remittance flow implies that others are simply choosing more preferable alternatives. The formal

sector would need to undergo some radical changes in the way they approach migrant workers

as valued customers to draw them back to the sector. That said, with a renewed approach that

puts the migrant worker needs at the center, the formal sector has the potential to offer

considerable advantages and could put the migrant worker back into a decision-making position

with regard to how their money is saved or used.

Formal or informal: The development perspective

From the development perspective, the issue is how remittances are translated into social welfare

improvements and sustainable poverty reduction impact. The substantial amount of remittances

to Indonesia and significance of remittances to the economy—especially in migrant sending

areas—justifies greater attention to this as a development issue. For reasons discussed, it would

appear that there are significant improvements that could be made in this respect. Once again,

the formal sector is not offering any added value over the informal sector as there are few savings

or investment instruments tailored to the needs of migrant workers, and no efforts to market or

educate migrant workers in how improvements could be made, thus not making the contribution

it could to overall development impact.

In this case, it is not whether the formal or the informal sector is chosen that is important, but

whether the transfer mechanism of choice offers the instruments that help the migrant workers

to invest effectively for sustainable benefits. If there are informal sector mechanisms that offer

ways to reach migrant workers and their families more effectively and with appropriate instruments

then these too are valid and need to be recognized.

Formal or informal: The financial sector perspective

From the financial sector perspective, the changed global scenario after September 11, 2001, has

prompted the need to more effectively monitor money transfers without constraining financial

sector development. However, updating a country’s regulatory framework, including its Anti-

Money Laundering/Combating the Financing of Terrorism (AML/CFT) policies, could incur

additional costs on formal remittance service providers or reduce their accessibility thereby

reducing their competitiveness in the eyes of migrant workers. Since the decrease in remittances

26


coincides with the introduction of AML/CFT regulations, this may be a factor in the Malaysia–

Indonesia remittance corridor.

Hence, the formal sector approach needs to balance a well targeted regulatory framework in

the financial sector that ensures remittances are not used for illicit purposes, with better

instruments and services that attract migrant workers to use formal and regulated transfer

channels. The formal financial sector should view the informal sector as an enormous potential

market for formal financial products and services, which, if harnessed effectively, might lead to

sustained revenue growth and improved market share for financial institutions.

OPERATIONAL POLICY RECOMMENDATIONS

The transfer providers, whether formal or informal, therefore need to respond to the needs of the

migrant worker, as well as the development and financial sector perspectives. The following

recommendations on how this might be achieved are arranged into three areas:

1. Making the formal sector accessible and responsive to migrant workers

2. Facilitating migrant workers access into the formal sector

3. Formalizing and regulating the informal providers while maintaining their accessibility for

migrant workers

1. Making the formal sector accessible and responsive to migrant workers

(a) Increasing effectiveness of identification procedures. Both Indonesia and Malaysia need to

increase the security and reliability of identification, and ensure migrant workers have access to a

valid and acceptable form of identification so that it does not constrain migrants’ access to the

formal sector. This could be done by:

• Strengthening the reliability and credibility of national passports by ensuring that the

same number is not issued, and assessing the possibility of using biometric information

(fingerprints, etc) so that it is harder to fake passports identities.

• Ensuring that migrant workers have unrestricted access to their passports by amending

the Memorandum of Understanding clause that gives the employer the right to keep the

passport of the migrant worker.

• Continuing to pursue alternative forms of valid identification such as the Foreign Worker

Card being introduced in Malaysia, and expand access for undocumented migrants. For

example, in the US, Mexican Consulates in some places are issuing Consular Identification

Cards, regardless of migratory status in the United States, and this card is accepted by

some of the banks.

• Relax identification requirements for individual transfer of small amounts. This has been

done in the South Korea–Mongolia remittance corridor where foreign exchange regulations

were relaxed and no proof of legal status was required for transfers of US1,000 each or

US$20,000 per year.

27

(b) Customizing products and instruments for Indonesian migrant workers.There is a huge

potential for developing services and instruments that are tailored to the needs of migrant workers.

As the flows of migrants and remittances increase, the market potential and business case for

doing so is increasing also. In particular :

• Introduce innovative and flexible options for transferring remittances as has been done in

the Philippines where the Bank of Philippine Islands offers four types of fund transfer

systems to migrants: direct credit to account, branch pick up, door-to-door cash/draft,

and credit to another bank’s account.

• Provide pre-departure credit that is more readily accessible to informal migrants and at

competitive rates, making it more attractive to migrants at an early stage.

• Develop savings instruments either in the receiving country, or through transfers directly

to their home country, an instrument could be developed for home purchasing or

education funds. This would also give back more control to migrant workers, especially

female workers, over how their earned and transferred money is spent.

(c) Ensuring better assessment techniques of data and regulatory changes. Improved information

and data gathering and handling would help create better informed policy formulation for

facilitating migrants’ access to the formal sector. Improvements are needed in the following

areas:

• Improve data quality, gathering and reporting of remittance flows in order to help resolve

current discrepancies in measuring remittance flows between Malaysian and Indonesian

central banks, and provide more accurate figures for the balance of payment data in both

countries.

• Monitor and disseminate remittance transfer costs in the remittance corridor to bring

greater transparency to cost structures and improve ability of migrant workers to make

the best choices for them. In the US–Mexico remittance corridor, a Mexican Government

agency known as PROFECO has been working through Mexican consulates in the United

States and through its website to distribute information on remittance costs.

• Improve assessment procedures to comprehensively assess market responses to recent

regulations enacted in Indonesia that adopted a registration system for new remittance

service providers in terms of magnitude of remittance flows and contribution to

development feeding into future policy formulation.

(d) Enabling strategic partnerships between formal-and-formal and formal-and-informal

remittance service providers. Some strategic partnerships between formal operators are already

being developed in the corridor. Creative partnerships need to be encouraged to reduce

remittance transfer times and costs, and improve transparency through more standardized and

advanced tracking and monitoring mechanisms. The HimalRemit mechanism between Qatar and

Nepal in which the Himalayan Bank developed its own Internet-based system for remittance

transactions enabling the Bank in Nepal to disburse payments to the beneficiary on receipt of the

28


instruction over the Internet without waiting for the account to be credited financially by the

sending institution.

(e) Expanding the state’s role in encouraging formal transfers. Research on the use of

remittances25 showed that most migrants are expected to make significant contributions to local

governments or religious institutions on their return. This process could be made more transparent,

and the development impact of these contributions increased by considering the experience of

the “3x1” program in Mexico. In this program, remittances from overseas sent back through

formal systems into funds for small-scale development projects are matched with three dollars

for every one sent back, from federal, state, and subnational government.

2. Facilitating migrant workers access to the formal sector

(a) Expanding financial education. The current pre-departure financial literacy program is carried

out by the recruiting agents who have little incentive (and perhaps a disincentive if they are

providing the transfer services themselves) to do this well. In some countries the Indonesian

consulate is now providing additional training on arrival to migrants, though this may already be

too late if the migrant worker is tied to a credit arrangement. Improvements could be made by:

• Collaborating with financial institutions in providing the training and opening competition

by inviting different institutions to come and talk about the instruments they offer to

migrant workers. In the Midwest of the United States, 55 members of a New Alliance Task

Force including banks, community-based organizations, secondary market companies,

and private mortgage insurance companies, developed an action plan to educate young

immigrants on their financial options and improve access to the US banking system among

recent immigrants.

• Providing more information on financial services and options through the Indonesian

Embassy in Malaysia, or through the Ministry of Foreign Affairs in Malaysia, for example,

when migrant workers are issued their Foreign Worker Card (i.e., work permit).

• Encourage formal sector employers of migrant workers to provide financial literacy

training.

• Partner in financial literary training with nongovernmental organizations, cooperatives,

or other providers at the local migrant-sending areas to reach prospective migrants, and

also the families of migrant workers, and involve village leaders in helping to improve

financial literacy in the villages.

(b) Improving physical and institutional accessibility. Physical access either to the place where

remittances can be deposited and transferred, or to the place where remittances can be received

and withdrawn by the recipient are major considerations in deciding on appropriate options.

Improving physical or institutional accessibility needs to:

25 Use of Remittances Study, (currently draft under preparation by the World Bank)

29

• Build on the steps already being taken to introduce mobile phone banking and encourage

financial institutions to partner with telecommunications companies to develop mobile

financial services.

• Develop creative partnerships with informal sector providers that might be able to reach

more effectively the migrant workers.

• Improve user-friendliness of the financial institutions for the migrant workers, many of

whom, especially the women, may be intimidated by the formality, even more so if they

are not treated as a respected and valued customer. This may be done by educating bank

staff about the valuable contribution that migrants make to the economy. Training bank

staff to provide friendly and helpful service to migrants would help make the institutions

less intimidating. Western Union has led the way in many countries in this respect.

3. Formalizing and regulating the informal providers while maintaining their accessibility for

migrant workers

(a) Reducing costs by increasing competition. Allowing more providers to transfer remittances

has been slow to have an impact on the costs of transfers. For example, in much of the Caribbean

and Latin America, an initial increase in the number of remittance service providers led to a

relative reduction in average remittance costs. As the costs reduced, competition increased and

the number of providers declined again. However, it appears that only the more efficient providers

stay in the business at the lower costs and hence the costs stay at the lower levels. The decline in

average cost of sending remittances was strongly correlated with the increase of remittance

flows in the US–Mexico corridor. The causal relationship might run either way, i.e., increased

remittance flow allows for lower cost of individual transfer, or decreased costs encourages more

remittances to be sent home.

(b) Licensing and regulating informal providers. Both Malaysia and Indonesia are taking significant

steps to regulate informal individual and corporate informal providers so that remittances can be

better monitored and tracked, while migrants retain their access to these more flexible services.

• Ensure that licensing requirements for money transfer operators are lower than that of

banks, given the size and the risk of the industry. If the requirements for the license is high

(i.e., high capital requirements), money exchangers may continue to provide remittance

services informally.

• Include account mediators as part of the formal channel for distribution as these informal

operators often have better access to rural communities. These account mediators could

be considered “remittance agents”, a new figure under a specially tailored level of regulation.

• Provide training to the account mediators to enhance their financial capacity and

governance.

30


Concluding Remarks

In the end, it is the Indonesian migrant workers who make the choice of how to transfer and use

the remittances they send home, and their choice at the moment is clearly with the informal

sector. An underlying assumption in this report is that more formalized systems could improve

development and poverty reduction impact by providing greater security and reliability, reducing

costs, and improving options for investing in better outcomes. However, major changes in

approach are needed in the formal sector if they are to attract the migrant workers. Meanwhile,

the important role of the informal sector in providing easily accessible solutions is recognized.

And increased regulation of this sector, while an important element, needs to be done carefully in

such a way that it does not drive migrants to greater informality of transfers. Regulations need

to focus on enabling markets to function and encourage solutions, and migrant workers need to

be recognized for their important contribution to the economy and empowered to engage with

these markets.

31

34


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